Page 1

3/17/14

Banks –  Bail  in  &  Bail  out                  

Carsten  Valgreen    GIC  March  2013   Jason.Benderly@agmresearch.com    (970)  476-­‐7110,    Carsten.Valgreen@agmresearch.com    +45  61  66  71  83   Mary.Allyn@agmresearch.com    (970)  926-­‐0220,    Niels.Bjorn@agmresearch.com    +  45  29  89  58  04   www.AppliedGlobalMacroResearch.com   Copenhagen          Vail  

1 3/17/14  


The Long  run  View  –  Don’t  be  Short  Banks  

2 3/17/14  


The Bank  Carry  Game   What  a  Bank  is     •  •  •  • 

A Long  only  Illiquid  Credit  Por\olio   Leverages  approximately  10  _mes   Financed  by  Government  guaranteed  deposits  ...   …  or  the  interbank  market  which  is  guaranteed  by   the  Central  Bank   •  Pretending  to  be  a  AAA  credit   3   3/17/14  


How Would  You  expect  the  payout  of  this  Carry  Strategy  to   US  Banks,  Actual  return  on  equity  (Datastream) look?   20

20

15

15

10

10 US Banks,  return  on  equity  (FDIC)

5

5

0

0

-­‐5

-­‐5

-­‐10

-­‐10

-­‐15

-­‐15

-­‐20

-­‐20

84

86

88

90

92

94

96

98

00

02

04

06

08

10

12

14

4 3/17/14  


When and  why  do  you  lose  money  on  Banks?   50

50

% of  financial  corporation  value  added  (to  scaled  GDP  before  1950)

40

40 Commercial Banks, Net  interest  income

30

30

20

20

10

10

Commercial Banks, Net  non-­‐interest  income

0 -­‐10

0 -­‐10

Commercial Banks, Net  losses

-­‐20

-­‐20

-­‐30

-­‐30 35

40

45

50

55

60

65

70

75

80

85

90

95

00

05

10

5 3/17/14  


It’s the  Credit  losses  that  mafer  –  nothing  else   30 25

30

% of  financial  value  added  (GDP  before  1950)

20

25 20

US Commercial  Banks,  Net  income  before  loss  provisions

15

15

10

10

5

5

US Commercial  Banks,  net  income

0

0

-­‐5

-­‐5

-­‐10

-­‐10

-­‐15

-­‐15

-­‐20

-­‐20 35

40

45

50

55

60

65

70

75

80

85

90

95

00

05

10

Banking crisis  temporarily  boosts  net  pre-­‐loss  interest  income  because  of  higher  credit  spreads  

6 3/17/14  


Four Myths  About  Banks   1.  Banks  can’t  make  money  when  interest  rates  are  low   2.  Banks  can’t  make  money  when  the  yield  curve  is  flat   3.  Banks  can’t  make  money  when  capital  ra_os  are  high   4.  Banks  can’  make  money  when  regula_on  is  tougher   5.  Banks  (and  credit)  is  causing  economic  growth  

7 3/17/14  


Capital Ra_os  are  very  high  

… and  –  no  –  high  capital  ra_os  don’t  prevent  banking  crisis   14

14

%

13

13

12

12

11 10

11 US Banks  Total  Equity  capital  ratio  (FDIC)

10

9

9

8

8

7

7

6

6

5

US Banks  Tier  1  Equity  capital  ratio  (FDIC)

5

1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

8 3/17/14  


And –  yep  –  Credit  standards  are  being     competed  _ghter  again  even  in  Europe  –  as  always    

Euro area  

US

9 3/17/14  


Can this  go  on  forever?  

10 3/17/14  


Won’t deleveraging  kill  growth  in  banking  forever?   190

percent

percent

180

180

total private nonfinancial debt as a percent of GDP

170

190

170

160

160

150

150

140

140

130

130

120

120

110

110

100

100

90

90

80

1970

1975

1980

1985

1990

1995

2000

2005

2010

80

11 3/17/14  


Why Debt  –  and  bank  revenue  -­‐  lags  Nominal  Growth   7

7

$ trillions

$ trillions

current quarter's level of credit generating spe nding v e rsus mov ing av e rage

6

6

5

5

4

4

3

3

2

2

current quarter moving average

1

1

20

% ch (SAAR)

% ch (SAAR)

18 0

1970

1975

1980

1985

1990

1995

2000

2005

2010

0

20 18

total private nonfinancial (PNF) debt (1-qtr growth) versus credit generating spending (current qtr less moving average)

16 14

16 14

12

12

10

10

8

8

6

6

4

4

2

2

0

0

-2

-2

PNF debt growth credit generating spending

-4 1970

1975

1980

1985

1990

1995

2000

-4

2005

2010

12 3/17/14  


Dont worry  –  debt  will  be  back  

13 3/17/14  


Next US  Banking  Cycle  is  coming  up  

14 3/17/14  


And you  can  s_ll  catch  the  train  

Bank Inves_ng  for  Simple  Macro  Investors   Rule  1:  Never  buy  banks  at  more  than  1.5  _mes  book     Rule  2:  Never  buy  banks  when  home  prices  are  high  and  unemployment  low   Rule  3:  Buy  banks  during  recession/banking  crisis  when  sector  P/B<0.75  

15 3/17/14  

Valgreen  
Read more
Read more
Similar to
Popular now
Just for you